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What’s Driving Food Prices in 2011?

Demand shocks help drive 2011 commodity, food price increases

July 19, 2011:  A new report from Farm Foundation, NFP finds that while some of the same factors that drove commodity and food price increases in 2008 are at work today, new and very different factors have also emerged. The report, What’s Driving Food Prices in 2011?, cites the role of two persistent demand shocks—corn for biofuels production and soybeans for China—in the mix of factors pushing commodity price increases in recent months. Other factors include weather-related production shortfalls, changes in cropping patterns and a weak and volatile U.S. dollar.

  • Neil Conklin, President of Farm Foundation, NFP, discusses why the Foundation took on this project.
  • Purdue Economist Wallace Tyner summarizes the findings of the report.
  • Purdue Economist Philip Abbott talks about the impact of Chinese agricultural policies.
  • Purdue Economist Christopher Hurt talks about commodity prices, feed prices and market inelasticity

Farm Foundation, NFP commissioned the report from three economists: Philip Abbott, who works in international trade and macro factors; Christopher Hurt, who works in analysis of commodity markets; and Wallace Tyner, an energy and policy economist most recently specializing in biofuels policies. All three are on the faculty at Purdue University. The report builds on similar reports written by the authors for Farm Foundation in 2008 and 2009.

“Now, as in 2008, the full story behind rapid increases in agricultural commodity and food prices is not a simple one. In today’s environment of higher and more volatile prices—as well as budget constraints—policy makers and society are faced with difficult choices about fundamental elements of food, agricultural and energy policies,” says Farm Foundation, NFP President Neilson Conklin.  “The focus of this report is to broaden understanding of the nature and interactions of the respective factors, the implications for public policy, and whether circumstances have created a new era that will shift U.S. food and agricultural policy to one of shortages from one of abundance.”

The authors identified five key factors in shaping today’s price story:

Persistent demand shocks—specifically demands of the biofuels industry, particularly for corn, and China’s decision to import huge quantities of soybeans due to income growth and stocks-building.

Market inelasticity—a reduction in the responsiveness of prices to demand and supply forces—is one of the key mechanisms in today’s commodity markets.

Weather and grain stocks: Weather is more important in 2011 than in 2008. Wheat and barley suffered weather-related production setbacks, but large stocks tempered price increases. Corn stocks were drawn down when U.S. yields dropped in 2010. Soybean stocks have remained tight as Chinese demand has surged. With adequate stocks, rice prices have not increased.

Chinese Policies: China has been a major holder of agricultural commodities but the stocks-to-use ratio of each commodity has varied considerably over the past decade. The policy to accumulate substantial soybeans stocks through imports is one example of the impact on world markets.

Macroeconomics: A weaker U.S. dollar contributed to a commodity boom between 2002 and 2008. Today, changes are not as dramatic, but the dollar exchange rate remains weak and volatile.

“As with the earlier work, this report does not attempt to attribute the proportion of the price increases among the different drivers,” noted Foundation President Conklin. “Our goal with this report is to provide public and private decision makers with an objective assessment of the forces driving commodity prices, and offer some insights into the implications for policy options.”

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